The following article is excerpted from the September 2014 issue of the Housing News Report newsletter published by RealtyTrac.

Jilliene Hellman founded the real estate crowdfunding website RealtyMogul in 2013, not long after legislation passed making it easier to raise funds for business ventures through the Internet.

“Real estate is one of the last areas in financial services and investing that hasn’t leveraged the power of technology and the reach of the Internet to improve and transform an inefficient model,” wrote Hellman, who formerly worked in wealth management and risk management at Union Bank, in an email response to questions from Housing News Report.

“That changed when Title II of the JOBS Act passed, which allowed firms to more broadly solicit investors through the Internet – the most pervasive marketing channel of all,” continued Hellman, referring to the Jumpstart Our Business Startups Act (JOBS) signed into law by President Barack Obama in April 2012. “For the first time ever, accredited investors now have the option to invest online in real estate opportunities that were historically unavailable to them.”

But there are some catches to the crowdfunding story.

Constraints on Real Estate Crowdfunding
The good news is that crowdfunding legislation passed in 2012. Title II of the JOBS Act — the part which opens crowdfunding to accredited investors — became effective with passage of the legislation. The bad news is that crowdfunding regulations for unaccredited investors — Title III of the JOBS Act — have yet to be written. As the SEC explains, until then “we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

The key concept here is that until the Title III rules are written and implemented, real estate crowdfunding is only available to accredited investors, defined by the SEC as those who earn a minimum of $200,000 in annual income individually (or $300,000 as a couple) or a have a net worth of $1 million or more, excluding the value of their primary residence.

That constrains crowdfunding — for now — to a very limited pool of investors, severely limiting its promise, according to Jordan Fisher, managing partner of Inspire Capital Management Group, a private money fund based in Southern California that lends money to fix-and-flippers and other real estate investors.

“I am a big fan of giving a lot of people access to the type of real estate investments now only available to accredited investors,” said Fisher, explaining that won’t be the case until Title III of the JOBS Act is implemented by the SEC. “If that passes sometime soon that’s really going to change things and make it more of a Kickstarter type of thing.”

Real Estate Crowdfunding ‘Still in its Infancy’
Fisher’s company follows the more traditional route of acting as a lender that provides a single source of funds for each investment that it participates in, although he explained that its mortgage pool fund operates a form of crowdfunding “in terms of bringing investors together to invest in a fund that pools money together.”

But Fisher said the only way for his company to structure an agreement where multiple investors are investing directly in a single investment is “in the form of fractionalized deeds of trust where multiple parties each loan money which is pooled together to become a 1st trust deed,” a structure which he said is typically “just not an efficient way of doing things.”

For now Fisher considers true real estate crowdfunding “still in its infancy.”

“It’s talked about like it’s this big monster,” he said. “But I think there are all sorts of legal challenges … everyone has a different perspective on how you let nonaccredited investors participate.”

The SEC provided some insight into how it may allow nonaccredited investors participate when it published proposed standards for Title III of the JOBS Act on Oct. 23, 2013, asking for public comment.

First, a company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

Second, investors, over the course of a 12-month period, would be permitted to invest up to either:

As much as $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

Or, 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

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